A three-man panel of domestic trade experts has criticized the federal government over its decision to renege on an intergovernmental agreement on how financial institutions are to calculate the cost of borrowing in their disclosure documents to clients.

“Canada’s actions have undermined the processes of consultation and negotiation set forth in the Agreement on Internal Trade (AIT),” the panel says in a recently released report that addresses the wording of Ottawa’s Bank Act-Cost of Borrowing (Banks) regulations.

“The panel finds that the (regulations) caused injury to . . . federal-provincial relations generally, to provincially regulated financial institutions and to consumers.”

The Agreement on Internal Trade is an attempt, hammered out 10 years ago, to remove interprovincial trade barriers on products ranging from buttermilk to booze. It is Canada’s would-be NAFTA.

The Alberta government sought the arbitration after learning that the federal government had adopted Bank Act regulations that were written in a manner favourable to federally chartered banks, but contrary to an agreement it reached in 1998 with provincial consumer affairs ministers.

The federal decision put provincial governments on the spot with provincially regulated lenders because it created the illusion that bank clients got a better deal.

Alberta’s application was supported by the British Columbia and Quebec governments. The hearing was held March 15-16 in Ottawa and the ruling was delivered privately June 4 to give the parties a chance to settle the dispute. It was released publicly this month.

Panelists Bill Norrie of Winnipeg, Peter Meekison of Victoria and Chris Thomas of Vancouver recommended that Ottawa and the provinces and territories go back to the table “on an urgent basis and complete negotiations by October 15, 2004.”

The trade dispute panels are convened under the auspices of Industry Canada’s Winnipeg-based internal trade secretariat.

Provincial sources told Business Edge the federal government has ignored invitations to return to the table, even though the October deadline is fast approaching and the panel report encouraged prompt action to allow for non-pressure negotiations.

A federal Finance Department official said, however, that the government intends to return to the bargaining table with its provincial and territorial counterparts.

“At this point, no date has been set,” said the official who spoke on the condition of anonymity. “We fully accept the recommendations set out in the panel report – specifically, the panel’s call for all parties to meet at the earliest opportunity.

“We will continue to work with the provinces for the best possible protection for consumers.”

In a diplomatic though toughly worded 50-page report, the panel says that “by breaching the trust-ties that are essential for co-operative federal-provincial-territorial action . . . Canada may have damaged the provincial- territorial support . . . .”

“This situation could lead to the perpetuation of unnecessary trade barriers in Canada.”

Alberta Government Services (AGS) spokesperson Terry Cunha said his department is happy with the ruling. “We’re going to continue working with the federal government to find a solution to create a level playing field for all the lending institutions,” he said.

“Our main priority is to protect consumers across Canada.”

When the Bank Act regulations came into force in September 2001, the provinces realized there were significant differences between the final version and the drafts they were shown in 1999. They learned that the changes were made at the insistence of the federal Department of Finance.

Meanwhile, Alberta had become the first to adopt what it and the other governments had agreed to.

The province wrote the terms of the cost-of-credit disclosure pact into its new Fair Trading Act, a consolidation of consumer protection statutes.

Alberta’s Treasury Branches and credit unions reacted with outrage when they discovered the government has subjected them to more rigorous disclosure terms than what the chartered banks faced.

“Alberta led with its chin and its heart and passed the legislation,” noted lawyer Lorne Ternes, who presented the government’s case.

“What jurisdiction in the world would do what Alberta did – trumpet the values of co-operative federalism – and then get sucker-punched?”

“We all got caught,” said Ternes, commenting as a trade expert who has his own legal practice in Edmonton and who had a hand in negotiating the Agreement on Internal Trade on behalf of the Alberta government.

Six years ago, Canada’s provinces thought they had a deal when they adopted a legislative “template” for the disclosure of cost of credit information at the milestone meeting with the federal government in Charlottetown.

The governments agreed to use the annual percentage rate (APR) method of cost of credit calculation instead of the annual interest rate (AIR) method, which banks prefer. AIR is based on interest only, while other costs such as insurance and appraisal costs are included in the APR method.

The difference creates the illusion that borrowers get a better deal with the chartered banks. Institutions that use the AIR method can come out looking like they charge a rate of interest 1.2 per cent to 1.8 per cent lower than the rate charged by those using the APR method.

In his presentation to the trade panel, Ternes noted that 240 credit consumers in Alberta contacted AGS from November 2000 to November 2003 about cost of credit disclosure issues.

“Alberta worries that the credibility of future federal participation under the AIT has been cast into disrepute,” he told the panelists.

In addition, Ternes said the federal regulations allow the banks to waive the two-day cooling-off period for consumers about to obtain mortgage financing if they obtain independent legal advice – a tactic aimed at making lending more administratively convenient for the banks.

In its submission, the B.C. government argued the regulations impair internal trade and cause injury to provincially regulated institutions by providing the federal banks a competitive advantage.

Representatives for the federal government countered that the differences between the Bank Act regulations and Alberta’s cost of credit disclosure laws are inconsequential and would have little impact on internal trade.

They added that the banks raised valid concerns, and “Finance was required to take them into account.”

The Alberta government told the panel that the federal government’s action had immediate repercussions on the work of the Consumer Measures Committee, the standing committee that operates under the auspices of the country’s consumer affairs ministers.

“Some jurisdictions removed their bills that were set to go through their various legislatures,” testified Rick Solkowski, a senior AGS official. “I can say most jurisdictions lost confidence in the process and I believe that still remains the case today.”

Dispute panel decisions are not binding on governments.

Ternes said that under the AIT, sovereign governments agree to voluntarily temper their powers to promote trade. “This is very much a co-operative federalism kind of agreement,” he told Business Edge. “It’s very pro-Confederation . . . The principles of the AIT have been upheld.”

(Brock Ketcham can be reached at brock@businessedge.ca)